••• Tax & Spending •••

The flat tax through the lens of Iowa’s success story


Before last year’s legislative session, any talk about a flat tax in Kansas went exactly nowhere. Instead, a flat tax bill made its way to the Governor’s desk, where it was vetoed; attempts to override the veto fell short by a couple of votes. Votes seemingly motivated more out of political spite than substantive policy. A flat tax proposal is likely to return for the 2024 legislative session, so taking a look at Iowa’s own flat tax reform journey in 2022 illustrates much about what Kansas can expect from the legislation.

Iowa joined several other states – many economically, demographically, and geographically similar to Kansas – in enacting a flat tax. Colorado and Utah already have a flat tax on the books, and Idaho, Arizona, and Mississippi are planning similar reforms.

What is a Flat Tax?

Kansas taxes individual personal income. The tax rate increases based on different incomes, or brackets. A flat tax would be one single tax rate applied to all incomes. Under last year’s proposed flat tax in Kansas, all current deductions and exemptions still exist. But the rate of taxable income is just the same for everybody. Taxable income in Kansas includes wages, salaries, tips, bonuses, dividends and interest, commissions, and many various other types of personal income and investment. The income starts to be taxed after a certain amount is exemption, and standard deductions could be claimed for both single and marrier filers/

Kansas currently has three brackets. The year before their tax reform, Iowa had a whopping nine brackets, with the top rate of 8.53% affecting income above $78,435; for context, Kansas’s highest marginal income tax rate of 5.7% starts at income in excess of $30,000 for single and $60,000 for married filers. However, Governor Kim Reynolds signed a bill that starts off by cutting the system down to four brackets with a top marginal rate of 6%. Each year until 2026, the number of brackets reduces by one and the top rate decreases so that the final rate in 2026 is 3.9%.

Common Arguments Against the Flat Tax and the Iowa Example

Opposition to a flat tax will be quick to say that it only benefits the wealthy while people with lower incomes pay more. But that’s not true. The bill Gov. Kelly vetoed earlier this year contained an exemption of lower incomes so that people whose incomes currently are taxed below the flat rate also see a reduction in their taxes paid.

Kansas’s highest marginal income tax rate of 5.7% starts at income in excess of $30,000 for single and $60,000 for married filers. An exemption in a flat tax bill could make it so that income below $15,000 for single filers and below $30,000 for married filers isn’t taxed; currently, that number is only $2,500 for single filers and $5,000 for married filers. With Kansas’s median household income being $64,521, hundreds of thousands of people would have a tax reduction immediately.  A single filer making $30,000 in taxes today and taking advantage of the standard deduction and personal exemption pays $951 in income taxes currently, but because of the exemption of the first $15,000, will pay $463 in income taxes – that’s $488 saved.

When Iowa’s flat tax is in full effect by 2026, 98% of taxpayers with $10,000 or more of taxable income will have a lower tax liability at 3.9%. Iowa’s median household earning $60,253 would have its income tax burden decline by 26% from $2,765 to $2,052. 57% percent of Iowans supported their flat tax plan compared to the 24% who didn’t.

Another talking point is that people with higher incomes get more tax relief, and thus, the entire proposal for everybody is inherently “bad” because of it. The simple answer is that’s because, in Kansas, the wealthy pay the majority of the tax burden and thus are getting the largest relief. According to a four-year average of 2018 through 2021 tax returns from the Kansas Department of Revenue, people with incomes less than $50,000 made up 17% of adjusted gross income (AGI) in the state, yet paid 9% of the tax. On the other hand, people with incomes more than $100,000 made up 60% of AGI and paid 68% of the tax.

Iowa is one of the 24 states that have cut their income taxes since 2012 and haven’t seen the same economic consequences that Kansas faced after Governor Brownback’s “tax experiment.” What failed in Kansas was that taxes were cut while spending increased. Budgets were not slashed as alleged; General fund spending was $6.098 billion in FY 2012, and it increased to $6.276 billion by FY 2017.  KPI’s 2012 analysis shows that a one-time 8.5% reduction (or several small deductions over three years) could have balanced the budget until the state could have reaped positive economic benefits.

Why a Flat Tax?

It’s surprisingly easy to “lose the forest through the trees” when discussing tax reform: why is this important at the end of the day? For one, it’s more money in people’s pockets. Families know how best to spend for themselves, and a few hundred dollars saved in not paying taxes is money that can go to education, clothes, food, or other needs.

This money is then spent in other areas of the economy: $500 that a family would normally send to the Kansas government could go to a local business, such as a math tutor, or a downpayment on a renovation. The money that people save is the same money that banks loan out for investments, so the more that stays in the economy, the more investment and growth there is. A nationwide flat tax was estimated to increase savings by 10 to 20%.

Similarly, when people get to keep more of the money they earn, they’re incentivized to work more. Studies of flat taxes in Europe have found that their implementation increases the number of people working and the number of hours they work, with the most significant effects coming with tax cuts for people with lower incomes. Seven of the eight Eastern and Central European countries that adopted a flat tax in the late 1990s and early 2000s had a significant increase in investment per capita, employment-to-population ratio, and foreign direct investment as a share of GDP.

Kansas needs to join other states that have shored up their economies through income tax reform. It’s possible, and if Kansas wants to break its five decades of economic stagnation, it’s necessary.